Volatility Measurements – In Like A Lamb And Out Like A Lamb? Via @Connectedwealth
Thursday, June 30th, 2016
GrizzlyRock Value Partners was up 16.6% for the first quarter, compared to the S&P 500's 5.77% gain and the Russell 2000's 12.44% return. GrizzlyRock's long return was 22.3% gross, while its short return was -2.9% gross. Compared to the Russell 2000, the fund's long portfolio delivered alpha of 10.8%, while its short portfolio delivered alpha Read More
Contributors: C.Basinger, D.Benedet, C.Kerlow, D.Mak
Volatility Measurements – Today
Brexit this, Brexit that, already this is becoming a bit of a bore. Global markets don’t seem to care today as they are sitting roughly flat including Europe, Asia and the futures here at home. It is the end of the quarter in Canada as we get tomorrow off to celebrate Canada.
Since we are celebrating Canada tomorrow, the good news today is our economy grew in April after two months of contracting. +0.1% isn’t huge but the “+” sign is a nice change. Manufacturing and housing helped more than offset the drag from the energy sector.
June, in like a lamb and out like a lamb? Volatility measurements were very low at the beginning of June. This included the Merrill Lynch MOVE index that tracks Treasury vol, the VIX which measures U.S. equity market vol and the JP Morgan global Fx vol for currencies. As the Brexit vote neared, these all started to rise and then jumped on the surprise vote. Now less a week later, these three measures of volatility are almost back to the levels at the beginning of June. That is impressive and while we wouldn’t say everything is smooth sailing, it is evidence of a rather resilient market. The chart of the day is these 3 volatility measures over the past year. Note the Brexit surprise didn’t even come close to the weakness in Jan/Feb nor last August.
Surprisingly the FTSE is actually up this month, but not if you take the currency into account. In Canadian dollars the FTSE is down 6.5%, while the DAX is down -7.7, and the Euro Stoxx is down -8.5%. The NASDAQ is off the most in North America, down -4.4% while the TSX is only down -0.21% this month. A heavy gold weighting is helping, boosting the Materials sector up 11.7%. Interestingly Energy (+1.1%) is still positive for the month, not your typical defensive darling. Not surprisingly Telco’s and Utilities have also been strong in Canada and the U.S. plummeting yields certainly helps these near equity/bond proxies.
Oil is on pace for its biggest quarterly advance since 2009, up 29% over the past three months. That’s where the good news ends this morning unfortunately. Some negative crude headlines this morning, lead us to wonder what’s in store for the 2H for the crude market. Near $50/bbl, we wonder what will happen when the world’s largest incremental buyer finally tops up their reserves. According to JP Morgan, China looks to be almost done amassing their crude stores, crude imports could decline 15% in the coming months. They have already stockpiled 400m bbl of oil in their reserves, close to two months of net imports. Talk of a Nigerian cease fire, is also taking off some of the political risk baked into the price.
Interestingly, despite the new crisis in the EU as George Soros puts it, U.S. investor confidence actually picked up this week. The latest AAII sentiment readings show the bulls gaining some steam at the expense of both the bearish and neutral camps. Investor sentiment readings are important in gauging confidence as well as identifying behavioural extremes. While we don’t see any extreme measures at the moment, it’s defiantly a reading we keep an eye on to identify key turning points in the market.
Fed stress test results are in, and it looks like for the most part we’ll see a boost to shareholder payouts. Expect a big buy back from JP Morgan, it announced a buyback of to $10.6 billion of stock, up from $6.4 billion last year. Citi is tripling its dividend, and Morgan Stanley will raise their dividend by 33%, despite some “material weakness” noted the Fed. Some foreign banks with significant U.S. business did not fare so well. Both Deutsche Bank and Santander failed for the second year in a row. To the right, we also show the full results via Reuters.
Diversion: Too bad the current ‘three amigo’s’ don’t dress as well as the originals. By the way do you remember what happens when the Three Amigos enter a bar? Some tequila, and a musical number of course.
Boeing is looking at extending the size of their 777 to compete with Airbus Groups A380 superjumbo. This double decker plane is rumored to be of interest to Emirates. The plane is expected to have a capacity of 450 passengers. M&A activity in Canada is the highest it has been since 2007 with the buying over a slew of industries. This has been a boon for capital market firms like GMP Capital which is up over 50% off the January lows. TransCanada’s purchase of Columbia Pipeline Group for $12bb is the biggest of the year so far. It is rumored that Lions Gate is looking at purchasing cable channel Starz for somewhere around $2.8bb.
Oil is paring gains of the best two days this morning down roughly 2%. The commodity is still poised to finish the strongest quarter since 2009 today. Supply disruptions and falling output from the U.S. helped spark a roughly 80% rally of the February lows. The biggest diamond found in the past century failed to sell last night in an auction in London. The seller Sotheby, was unable to get the $86mm they were hoping for. The highest bid came in at $61mm, below the threshold they had for the stone. Gold is flat this morning as fund managers rebalance portfolios after its massive run this quarter and imports from India were reported lower this morning.
Fixed Income And Economics
A nice economic headline is coming across the wire as we head into Canada’s birthday with StatsCan reporting that our economy grew by +0.1% during the month of April to snap three straight months of declines. Year over year, GDP rose by +1.5% to beat expectations for a +1.4% increase and mark the biggest gain since January. Details in the release show that service-producing sectors carried the load with a +0.2% increase, helped by gains in the real estate (+0.5%), transportation (+0.4%), and retail trade (+0.2%) categories. Goods-producers were down -0.1% on softer growth in mining/quarrying (-1.4%). The arts/entertainment category fell by -3.9% for its largest decline since February 2014, faulted by the absence of Canadian teams in the NHL playoffs according to StatsCan. Manufacturing output rose by +0.4% and break consecutive months of declines. Overall, it’s a decent report despite being two months stale and we see the loonie rallying post-release to below 1.3000 against the greenback.
Treasury markets are rallying across the curve after a strange day of trading yesterday. We saw U.S. benchmarks start the session higher, trade flat after the 8:30AM EST personal consumption data, then diverge by day’s end as the short end sold off in lieu of rallying for longer duration. This resulted in the curve flattening considerably as the 2-30 Treasury spread narrowed to as little as just +166.17 basis points. That is the lowest since before the global financial crisis and trumps the results seen during Operation Twist. The spread is a little steeper this morning to +168.5 bps but still, we are starting to venture into unchartered territory here. Two year Treasury debt started the month of June yielding 0.90% and are now at 0.62% (after briefly hitting the 0.50% mark). You’d think that would help normalize the curve a little but the movement in long’s has been even more impressive. The 30 year government benchmark sat at 2.67% exactly thirty days ago. This morning, it is yielding 2.30%. That translates to a +7.30% return (excluding coupon interest) this month alone! Who said bonds are boring? Regardless, there is chatter on the street that we could see further gains in the long end with the PBoC loosening their Yuan fix this past week which will theoretically export deflation (lowering inflation expectations and keeping a lid on long yields) to the rest of the world. Please reach out to the authors of the LaunchPad for those looking for a very cool chart on this trend seen since last year.
Chart Of The Day
Quote Of The Day
If you find your axe is too short, add to its length by continuing to take steps forward. – Viking Proverb